Case Study – the PCS Wireless Exit Transaction

Strategic value can make all the difference between success and failure

Occasionally an exit goes much better than anyone dared to hope. This is the story of how the PCS Wireless exit worked out exceptionally well for some of the participants even after the company looked like it wasn’t going to be a success.

The Call That Started It All

After five or six years of consistent success, the board of Nexus Engineering was very comfortable with our ability to bring new products to market. As the CEO, I had discretion to undertake new R&D projects without formal board approval as long as the budget was under $500,000.

One day, while I was in my car, I got a phone call from Nick Hamilton-Piercy, CTO at Rogers Cable. Nick explained that he had a top secret R&D project that needed a development partner but I had to commit on the call because he was under a severe time constraint.

Our Relationship with Rogers

We’d done a lot of business with Rogers Communications. I consider Ted Rogers a friend and often went fishing with his Chairman and CEO. We had worked hard to earn their respect as the technology leader in the cable television industry.

A few years earlier, Ted Rogers had decided to enter the cellular telephone business. He personally put up the money to bid for one of the two early cellular licenses in Canada. His bid was successful and Ted started a company called Cantel. The company is now branded Rogers just like their cable products. One of the goals Ted set for his organization was to find a way to capitalize on his cable television network to enhance his wireless phone business.

The Big Idea – PCS Microcells or Distributed Antennas

The Rogers Cable engineering team was well respected all around the world. They worked hard on Ted’s challenge and came up with an exciting idea. They had done the paper design and now needed a partner to actually build a prototype and hopefully put it into production.

I told Nick our company was very interested and assured him that I could commit our organization on the call. He went on to describe a fascinating idea that involved deploying a network of small microcells, or distributed antennas, to provide better next generation wireless phone coverage using the cable television network for the backhaul. I was excited by the opportunity and ten minutes into the call committed to partner in the development and manufacture of this fascinating new product.

PCS Microcell Startup

When I got back to the office, we picked a team of our best research engineers and launched the project later that day. At that time, the wireless phone industry was calling the next generation of phones, Personal Communication Services or PCS. We called the project “PCS Microcell.”

We worked hard on the project for about a year. There were several times both Nick and I thought there was a fatal flaw in the design, but after some serious head scratching and lot of hard work, we found a solution for each technical hurdle. We built a demo network in our lab and then installed one on a real cable network in a secret location. The new PCS microcells dramatically improved the economics of deploying a new wireless phone network.

The PCS wireless project was great fun for everyone involved. Working with the Rogers engineering team was challenging and exciting. From day one, we knew we had the best team in the world working on this concept and we maintained that lead even as others started to see the opportunity.

Beam me up, Scotty – the Product Launch

Once it was time to unveil the product, in true Ted Rogers fashion, there was a big media event. Ted hired Jonathan Frakes, of Star Trek fame, to be the spokesperson during the announcement. Ted and I stood on the stage at Science World with Jonathan Frakes who was wearing his Star Trek costume and, as corny as it sounds, he opened up a PCS phone and said “Beam me up, Scotty.” He pulled it off perfectly and the crowd went wild.

PCS gets sold the first time

By the time we started to sell the Nexus Group, PCS Microcell was a separate company. We structured it that way primarily to provide a motivating equity incentive for the engineering team. This was part of our advanced pay for performance philosophies that were a large contributor to our success.

During the Nexus sales process, we disclosed PCS Microcell to Scientific Atlanta, but at that stage in the development of the cellular telephone business S-A wasn’t interested in PCS. This suited me just fine, because my personal plan was to buy the PCS business and continue to grow it. Once the acquisition of Nexus Engineering, and one of our other subsidiaries, had been completed by Scientific Atlanta, I approached the Nexus Group board and offered to buy the business.

I offered $1.75 million and was prepared to go as high as $2 million to buy the company. I was still young, and I made a strategic error in my offer to the Nexus board. My board knew me too well. They knew if I was offering $1.75 million that it was probably worth more. They also knew that now I could afford to pay more.

Some of the board members wanted to sell me the business, but understandably had a problem because of the conflict. No matter what happened later, a sale of one of the Nexus Group companies to the CEO couldn’t be done while following good governance unless there were other bidders.

I get outbid by one of our team and PCS goes public

One of the rising star business unit managers at Nexus was Derek Spratt. Derek ran our commercial satellite receiver division. He is a very talented engineer and natural entrepreneur. His enthusiasm and passion for technology is infectious and has served him well through his recent CEO positions at Intrinsyc and Mobidia.

Everything was ‘open’ in the Nexus Group so Derek was aware of the potential in the PCS Wireless business. Derek worked with a previous partner of his, Ralph Scobie, and put together an offer to acquire PCS Microcell from Nexus. I still remember Derek walking up to me in the lunchroom and saying he wanted to buy PCS. I was a little surprised when I realized who my competition was, but on the other hand, I was quite pleased it was Derek. It didn’t take very many hours for Derek and Ralph to increase their offer to about $2.6 million including a good sized block of stock. Our board approved the transaction (reinforcing their belief that whatever amount I wanted to pay wasn’t enough).

The additional shares ended up adding about million dollars to the final sales price after Derek and Ralph named the company PCS Wireless and took it public. So it worked out very well for everyone – as it should in a well designed exit transaction.

TDMA vs. CDMA

There was one catch. The entire idea of a PCS microcell overlay on a cable television network only worked with cell phone networks based on Time Division Multiple Access (TDMA). Qualcomm had a competing standard based on Carrier Division Multiple Access (CDMA). The TDMA standard was developed and manufactured in Europe, primarily by Nokia and Ericsson. At that time, there was an enormous engineering debate about which of the two multiple access technologies had better spectral efficiency.

This debate was raging because, at that time, the major American telephone companies had not decided on a standard for their wireless deployment. They knew they had to pick one standard so they could offer roaming to their customers.

The Engineering Evaluation

The Telcos set up a multi-company engineering team in Atlanta to determine which of the two standards would be deployed by the major US phone companies. Through an engineering connection in a dingy bar we had some fascinating technical insight into how this engineering evaluation was proceeding. As we heard it, and as it was described in the technical press, there didn’t seem to be any technical advantage to CDMA over TDMA. TDMA was also a much more refined product and was a well established standard in dozens of countries around the world. The engineers doing the evaluation were increasingly convinced that TDMA was the best choice for the American Telcos. As a deadline for an announcement approached, there was an enormous amount of anticipation about which way the big American companies would go.

Friends of our friends who drink beer together were absolutely sure America was going to go TDMA. If this had happened, the PCS Wireless business could have been worth billions of dollars. PCS, at that point, was a public company trading on the TSX venture exchange. The PCS stock steadily increased and was worth well over $100 million based in part on the belief that America would go TDMA.

Politics Trumps Engineering and Economics

On the day of the announcement, to the absolute shock of engineers and wireless executives all around the world, the big American Telcos decided to go CDMA. This made Qualcomm a much more valuable company and established CDMA as the second global standard. Nobody could understand it.

Years later, in a much classier drinking establishment, I had it explained to me. As I heard the story, the day before the announcement was to be made, in a last ditch effort, someone very senior in the CDMA camp called someone very senior in the White House who called someone very senior at the one of the big Telcos. The person from the White House said he thought it would be better if America went with an American technology. It was a fascinating lesson for me as a young CEO and engineer to see how politics trumped technology and could shift enormous economic decisions.

Unfortunately for PCS, when the announcement came out, the stock cratered.

The Exit Strategy

Ralph continued to work hard on PCS for a while, but with the American Telcos going CDMA and the stock continued to languish. Ralph invited me in for a coffee to get my advice on what do with the company.

I was very fond of the technology, and thought there was some core value in the excellent engineering work that been done both at Nexus and later in the spin out company. Even with America going CDMA, I still thought I could sell the company. At that point, I had some time available in my schedule and was looking for an interesting project. Over that first coffee we agreed on a monthly work fee and success fee for me to find a buyer.

I spoke with decision makers at a few dozen wireless companies around the world. About six months later we had a short list and one very interested bidder in Toronto, a company called Unique Broadband Systems (UBS).

UBS was a publicly listed company that had put a lot of money into another wireless technology but really hadn’t gotten the sales traction. They were working on a market and application that was quite different from PCS, but I thought the same technology could have strategic value. After a few conversations and a meeting I was able to show the UBS CEO the strategic value for them in the PCS Wireless technology. After a few more trips to Toronto we had the outline of a term sheet.

The challenge was UBS would have to raise the money to acquire PCS. As often happens, for me to succeed in selling PCS, I was going to have to assist UBS in financing the transaction.

We need to expand the board to raise the money

The UBS Board was just the CEO and CFO of the company. To do a good sized financing they needed to expand their board and improve their governance. A few years earlier, I had introduced Ralph Scobie to my favorite securities lawyer Paul MacNeill. I suggested to Ralph that if we could recruit Paul MacNeill onto the board he could help with the legal process and add the credibility UBS needed to be financeable. Ralph thought that was a good strategy and we went to Paul to see if he would consider it.

Even back then it was not easy to get somebody to join a public company board. Paul was very reluctant. Ralph and I twisted Paul’s arm pretty hard. Paul was a smart fellow and also knew there was a lot of legal work involved in the merger of two public companies and a public financing. Paul reluctantly said that he would join the UBS board if we could get him a reasonable. Ralph and I flew back to Toronto to try to talk to the CEO of UBS into allocating a reasonable option position for Paul. Unfortunately, they had already allocated all of the options and there was only a paltry number available for Paul. We tried everything we could to increase the size of the option pool to something that was within the range of being fair to Paul, but it was just not possible.

We flew back and explained to Paul that there was only a miniscule option position available. Ralph and I called in every favor we could think of and pledged all of our future securities law work if he would do us this favor. Paul was a great guy and agreed.

The transaction completed and UBS acquired PCS for a good price and some stock. It was structured as a merger, but it was really an acquisition. Ralph, and the entire PCS team, was very happy with my success in finding a buyer for their company. Over the next while UBS did well and we were able to sell our shares and options and make even more money.

Our Lawyer Makes $5 Million

The fascinating twist in this story is that the person in our team who made the most money out of the PCS Wireless stock was Paul MacNeill. Paul was doing very well in a number of his other investments and was very sensitive to how the market would perceive any shares sold by a director. His option position in UBS was so small, I think he probably forgot about it for a couple of years. Based in part on the PCS Wireless acquisition, and the market conditions during the mid and later 1990s, the UBS stock started to move.

As sometimes happens with microcap stocks as the UBS price and volume increased it captured the attention of more and more market participants. The stock climbed higher and higher. At one point it had a $2 billion market cap.

Paul and I had lunch and he asked me what he should do with his options. I’d also forgotten about them and was still embarrassed by how small a number he received. I did the math in my head and sucked in my breath. Paul’s option position was now worth several million dollars. My very strong advice to Paul was to sell as fast as possible. Paul was still enthusiastic about the company and was reluctant. I actually remember slamming my fist on the table, looking him straight in the eye and saying ‘Diversify – sell at least three-quarters of that position as fast as you can’.

Paul took my advice, sold his stock and filled in his insider report.

Part of the reason I can tell this story is the fact that the amount Paul made is a matter of public record, because he was still an insider. The amount was reported in our local newspaper, The Vancouver Sun.

Paul made over $5 million on his UBS stock.

Sometimes an exit transaction can take a situation where everyone has lost hope and make it turn out very well for everyone.

And sometimes even a reluctant board member with a small option position can make $5 million from an exit transaction that went particularly well.

Derek’s Perspective

For some fascinating insight into the PCS Wireless story from Derek’s perspective, have a look at his very well written perspective on PCS wireless.

Testimonial from Ralph Scobie, CEO of PCS Wireless

Now that the sale has completed and I’m back from holidays, I wanted to write to thank you again for your outstanding and unique contribution to PCS Wireless. I came to you in early 1997 asking you to develop an entirely new business strategy for our company and to help with some acquisitions, or possibly, a sale.

Your strategy of repositioning the company as a player in the broadband market was perfectly timed and brilliant. I clearly recall your assurances and conviction that this area would be white hot in a year or so. It happened just as you predicted. I remain extremely impressed and thankful for your vision and acumen in completing this terrific acquisition.

Your introduction and strong recommendation to Unique Systems as a potential strategic investment or acquisition repositioned PCS to where it had a significant opportunity for growth over the near and long terms.

Your strategy worked so well that the companies merged and on the back of the Broadband Network sale, our stock went up over 400%. Needless to say, my major shareholders and I are eternally grateful.

When we started to work together, someone asked me whether I thought the deal you struck with PCS was expensive. I said that it wasn’t if you delivered. You delivered more than I hoped and today it looks like an incredible bargain even at twice the price.

Working with you in 1997 was both fun and lucrative for me. I hope we can find an opportunity to work together in the future.